Legislature(2015 - 2016)SENATE FINANCE 532

01/27/2015 09:00 AM Senate FINANCE


Download Mp3. <- Right click and save file as

Audio Topic
09:01:52 AM Start
09:03:02 AM Presentation: Oil and Gas Tax Credits
11:00:45 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ Presentation: Overview FY17 Operating Budget TELECONFERENCED
Departments: Environmental Conservation and
& Audit Consultants, enalytica
                 SENATE FINANCE COMMITTEE                                                                                       
                     January 27, 2015                                                                                           
                         9:01 a.m.                                                                                              
                                                                                                                                
9:01:52 AM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  MacKinnon  called  the  Senate  Finance  Committee                                                                    
meeting to order at 9:01 a.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Senator Anna MacKinnon, Co-Chair                                                                                                
Senator Pete Kelly, Co-Chair                                                                                                    
Senator Peter Micciche, Vice-Chair                                                                                              
Senator Click Bishop                                                                                                            
Senator Mike Dunleavy                                                                                                           
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Janak  Mayer,  Partner,  enalytica; Nikos  Tsafos,  Partner,                                                                    
enalytica.                                                                                                                      
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^PRESENTATION: OIL and GAS TAX CREDITS                                                                                        
                                                                                                                                
9:03:02 AM                                                                                                                    
                                                                                                                                
JANAK  MAYER,  PARTNER,  ENALYTICA, introduced  himself.  He                                                                    
announced  that  the  current legislative  session  was  his                                                                    
fourth consecutive session. His  expertise had been utilized                                                                    
for  oil and  gas  tax  reform; and  most  recently for  the                                                                    
Alaska  Liquid Natural  Gas  (AKLNG)  project. The  prepared                                                                    
documents  on the  day's agenda:  background on  oil prices,                                                                    
and the fundamental causes for  the movements in the market;                                                                    
and the  impact of the lower  oil prices on the  tax credits                                                                    
within Alaska's production tax system.                                                                                          
                                                                                                                                
Co-Chair  MacKinnon   clarified  that   her  last   name  is                                                                    
currently "MacKinnon."                                                                                                          
                                                                                                                                
NIKOS TSAFOS, PARTNER, ENALYTICA,  shared that he had worked                                                                    
for ten  years as a consultant  for ten years with  a number                                                                    
of  companies,  with  a focus  primarily  on  gas  marketing                                                                    
commercialization.  He had  also  worked  broadly on  energy                                                                    
economics. He  discussed the PowerPoint, "Impact  of Oil and                                                                    
Gas Production  Tax Credits at  Low Prices" (copy  on file).                                                                    
The presentation  was intended to understand  the oil market                                                                    
by outlining his process for evaluating the market.                                                                             
                                                                                                                                
9:05:32 AM                                                                                                                    
                                                                                                                                
Mr.  Tsafos  looked at  slide  2,  "Oil Price  Drop:  Higher                                                                    
Supply and Weaker Demand." The  greatest recent issue in the                                                                    
oil market was  the boom in oil production in  the Lower 48.                                                                    
He  pointed to  the left  chart and  stated that  the United                                                                    
States added  almost 5 million  barrels a day  of additional                                                                    
production  since   January  2010.  The  world   market  was                                                                    
approximately  90  million  barrels  per day,  so  adding  5                                                                    
million  barrels per  day had  significant impact.  However,                                                                    
there  seemed to  be occurrences  such  as accidents,  civil                                                                    
wars, or  matters of policy  that restricted  oil production                                                                    
in other parts of the world.  The red line in the left chart                                                                    
represented the  additional barrels from the  U.S. The green                                                                    
line represented  the unplanned  outages. The  sudden uptick                                                                    
of the green line represented  the civil war in Libya, which                                                                    
took some oil  of the market. There was also  a civil war in                                                                    
Syria, so  that oil  was off  the market.  The U.S.  and its                                                                    
allies tightened sanctions  on Iran, so some  of the Iranian                                                                    
crude oil came off the market.  He stressed that the boom in                                                                    
the  U.S. production  did  not have  a  benefit in  pricing,                                                                    
because of  the counter oil  production loss in  other parts                                                                    
of the  world. The  middle chart  represents the  global oil                                                                    
production.  In  2010  and  2011,   there  was  very  little                                                                    
production growth, but 2012  saw increased production. There                                                                    
was  very little  production growth  from 2012  to 2013.  He                                                                    
stressed  that   with  each  U.S.  addition,   there  was  a                                                                    
reduction  in  another  part  of  the  world.  There  was  a                                                                    
remarkable  increase  in production  from  2013  to 2014  of                                                                    
approximately 1.5  million barrels  by the time  the outages                                                                    
halted,  and other  oil was  added  to the  market. The  oil                                                                    
price decline occurred in the  first six months of 2014. The                                                                    
final  chart  represented  the   forecast  for  oil  demand,                                                                    
provided by the International  Energy Agency, which was part                                                                    
of the Organization of  Economic Cooperation and Development                                                                    
as  a forum  for  developed countries  to coordinate  energy                                                                    
policy.  The  forecast  for January  2014  showed  that  the                                                                    
market would  grow by 1.4  percent. He pointed out  that the                                                                    
sudden decline  was a result of  Chinese development slowing                                                                    
down,  quantitative  easing  from  the  federal  government,                                                                    
crisis in the Euro zone, and other broad economic news.                                                                         
                                                                                                                                
9:11:29 AM                                                                                                                    
                                                                                                                                
Mr.  Tsafos continued  to discuss  the  right-hand graph  on                                                                    
slide 2. He remarked that it  was a 90 million barrel a day,                                                                    
so   approximately  900,000   barrels  per   day  is   lost,                                                                    
reflecting a  1 percent decrease.  In 2015, there was  a 0.5                                                                    
percentage  loss. The  supply that  was previously  flat was                                                                    
growing  by   1.5  million  barrels  per   day.  The  demand                                                                    
expectation, which was robust,  had decreased by 1.5 million                                                                    
barrels  per day.  The combination  was the  reason for  the                                                                    
extraordinary  decrease   in  the  price  of   oil,  from  a                                                                    
fundamental  perspective.  Excess  supply  and  bare  demand                                                                    
occurred at the  same time, which applied  great pressure to                                                                    
the oil price.                                                                                                                  
                                                                                                                                
Senator Hoffman wondered when the  FY 15 forecast ended. Mr.                                                                    
Tsafos replied that each month  represented the forecast for                                                                    
each year, as it devolves with each month.                                                                                      
                                                                                                                                
Vice-Chair  Micciche commented  that there  was growth,  but                                                                    
lower than predicted growth.                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon  surmised  that the  United  States  was                                                                    
benefitted from  increased production,  and the rest  of the                                                                    
market was unaffected.  The world chaos had  great impact on                                                                    
the price  of oil, and the  other markets were back  on line                                                                    
with  the  U.S. production.  More  oil  was available  in  a                                                                    
relatively weaker  global market. Mr. Tsafos  responded that                                                                    
the U.S. was benefitting  from the increased oil production,                                                                    
however there  was no  benefit of  cheaper oil.  He stressed                                                                    
that  the  consumers  still pay  international  prices.  The                                                                    
refiners  were finally  able  to  arbitrage between  cheaper                                                                    
U.S.   oil  and   more   expensive  internationally   priced                                                                    
products.                                                                                                                       
                                                                                                                                
9:16:08 AM                                                                                                                    
                                                                                                                                
Senator Dunleavy wondered if Iraq  was producing at its peak                                                                    
production,  or had  its civil  war scaled  back production.                                                                    
Mr. Tsafos replied  that there were two ways  to answer that                                                                    
question. He  stated that  there was a  hope for  Iraq three                                                                    
years  prior,  but  Iraq  as   currently  far  off  of  peak                                                                    
production.                                                                                                                     
                                                                                                                                
Senator  Dunleavy  surmised  that   Iraq  was  off  of  peak                                                                    
production  potential. Mr.  Tsafos  agreed.  He stated  that                                                                    
Iraq felt  that they  should be producing  as much  as Saudi                                                                    
Arabia.                                                                                                                         
                                                                                                                                
Senator  Dunleavy   stated  that  Syria  was   not  at  peak                                                                    
production. Mr. Tsafos agreed.                                                                                                  
                                                                                                                                
Senator Dunleavy  wondered if Libya was  at peak production.                                                                    
Mr. Tsafos replied in the negative.                                                                                             
                                                                                                                                
Senator Dunleavy asked  if Iran was at  peak production. Mr.                                                                    
Tsafos  replied  that  Iran  was  not  at  peak  production,                                                                    
because of the sanctions.                                                                                                       
                                                                                                                                
Senator Dunleavy remarked that there  were a number of large                                                                    
producers that  were not at  peak production, but  the price                                                                    
was driven down  by over-supply. He surmised  that the price                                                                    
of oil  would be  driven down even  further, because  of the                                                                    
greater supply. Mr. Tsafos replied in the affirmative.                                                                          
                                                                                                                                
Senator   Dunleavy  stated   that   there   were  many   oil                                                                    
predictions that  showed an increase  in oil  production. He                                                                    
wondered if low  oil prices should be expected  for the near                                                                    
to distant future.  Mr. Tsafos stated that  he would respond                                                                    
to the question after two slides.                                                                                               
                                                                                                                                
Mr.  Tsafos  highlighted  slide  3,  "OPEC  Behavior  not  a                                                                    
novelty."  He   stressed  that   the  Organization   of  the                                                                    
Petroleum  Exporting Countries  (OPEC) did  not control  the                                                                    
price  of oil.  The  top chart  showed  OPEC's market  share                                                                    
since 1965.  He remarked  that the  composition of  OPEC had                                                                    
changed over time.  The bottom graph showed  the quotas. The                                                                    
chief mechanism  through which OPEC  attempts to  manage the                                                                    
market was  by setting quotas,  which say how much  oil OPEC                                                                    
countries would produce. He stated  that OPEC was founded in                                                                    
1960,  but the  quotas were  not introduced  until 1982.  He                                                                    
remarked that  different countries, at different  times, had                                                                    
agreed to  the quotas. He  looked at the yellow  line, which                                                                    
represented  Ex.  Iraq,  which  showed that  Iraq  had  been                                                                    
exempted from quotas. He remarked  that quotas were based on                                                                    
a concept  of agreement. He  shared that OPEC  had attempted                                                                    
to  set  the  price  of  oil up  until  the  mid-1980s.  The                                                                    
stabilization  of  OPEC  was  not  intentional,  but  rather                                                                    
because  of  the  volatility  of   some  countries  and  the                                                                    
introduction  of   other  locations  to  the   market.  From                                                                    
approximately  1986 to  the Asian  financial  crisis in  the                                                                    
late 1990s, OPEC had followed the market.                                                                                       
                                                                                                                                
9:22:22 AM                                                                                                                    
                                                                                                                                
Mr. Tsafos continued to discuss  slide 3, and the history of                                                                    
OPEC.  There were  a number  of  events in  the late  1990s,                                                                    
where  OPEC  attempted to  stabilize  the  market, which  is                                                                    
reflected  in  the  quotas. The  graph  showed  some  short,                                                                    
drastic adjustments, because OPEC  was cutting and adding at                                                                    
a  monthly basis.  At that  time there  was an  up and  down                                                                    
jumble  in the  oil  price, because  there were  continually                                                                    
tweaks.  Eventually,  OPEC  realized  that  they  could  not                                                                    
micromanage the oil market, so  OPEC began to follow the oil                                                                    
market. In 2007, OPEC abandoned  quotas because the price of                                                                    
oil was  so high.  The most  recent financial  crisis caused                                                                    
OPEC to  conduct a series  of cuts,  in order to  arrest the                                                                    
price. The quota has been  set and maintained at 30 million,                                                                    
and has  stayed at  that level  for a  few years.  He stated                                                                    
that OPEC had not attempted  to actively manage the price of                                                                    
oil since the  mid-1980s. Rather, OPEC would step  in to put                                                                    
a flow underneath  a sudden shock in demand.  He stated that                                                                    
the oil  embargo in  1973 and the  Iran revolution  made oil                                                                    
very  expensive. At  that  point, Alaska  put  oil into  the                                                                    
market, because  the price oil  was profound at  that moment                                                                    
in time. When  the price of oil is high  enough to cause new                                                                    
oil to  be put on the  market, there was not  much that OPEC                                                                    
can do to halt that process.                                                                                                    
                                                                                                                                
9:27:09 AM                                                                                                                    
                                                                                                                                
Mr.  Tsafos displayed  slide  4,  "US Production:  Scalable,                                                                    
Diffuse,  Variable." The  three key  words in  the U.S.  oil                                                                    
production  were "scalable",  "diffuse", and  "variable." He                                                                    
discussed  the  work, "scalable."  He  looked  at the  Eagle                                                                    
Ford,  Texas  field  which began  as  basically  nothing  in                                                                    
January 2010  to 1.6 million  barrels per day  presently. He                                                                    
stressed that the increase did  not often occur in the world                                                                    
of  oil. Alaska,  Libya, and  the  North Sea  were the  only                                                                    
other  locations that  saw a  similar  rapid trajectory.  He                                                                    
looked  at  the word,  "diffuse."  He  stated that  the  top                                                                    
operator  in Texas  produced  less than  10  percent of  the                                                                    
state's oil  production. The top  thirty producers  in Texas                                                                    
produced  two-thirds  of  the state's  oil  productions.  He                                                                    
stressed that one  had to include up to  eighty producers in                                                                    
order to  examine the  entire scope.  He explained  that one                                                                    
well  could  be  thirty  times   more  productive  than  its                                                                    
neighbor.  He  remarked  that the  job  of  forecasting  oil                                                                    
prices  in 2010  and 2011  was focused  on two  numbers: the                                                                    
marginal  barrel and  at  what  price did  it  need to  come                                                                    
online. The  marginal barrel  was either  in the  deep water                                                                    
like Brazil or Angola; or it  was in Canadian oil sands. The                                                                    
forecast was formulated by examining  approximately 30 or 40                                                                    
projects,  and attempt  to understand  the economics  of the                                                                    
projects. Another data point was  examined by looking at the                                                                    
fiscal breakeven of OPEC countries.                                                                                             
                                                                                                                                
9:32:19 AM                                                                                                                    
                                                                                                                                
Mr. Tsafos continued  to address slide 4.  He commented that                                                                    
the lower  48 destroys  the logic  of OPEC's  forecasting of                                                                    
price.  The  scale  showed  that there  could  be  a  sudden                                                                    
increase  of 4  million  barrels a  day  of production  over                                                                    
three years,  which interrupts  the forecasting  ability. He                                                                    
remarked that the players within  Alaska had expressed their                                                                    
intentions, because  there were less than  ten major players                                                                    
in Alaska.  In Texas, however,  there were 50 or  60 players                                                                    
with different incentives,  capital structures, debt levels,                                                                    
etc.  He  remarked  that  gas  had  the  same  viability  in                                                                    
production  as oil,  the  rig count  fell  by one-half.  The                                                                    
activity fell by half, but  the production did not decrease,                                                                    
because  only  the  very  bad   wells  were  eliminated.  He                                                                    
stressed  that  it  was   becoming  extremely  difficult  to                                                                    
understand  the dynamics  in  the oil  market.  Many of  the                                                                    
models  that the  industry had  relied upon  were not  well-                                                                    
suited  to the  current  world's pace,  modern players,  and                                                                    
breakeven prices in the real  world at response to different                                                                    
incentives. Production  responded to  low oil prices  in two                                                                    
ways: reducing drilling  from the belief that  there will be                                                                    
no revenue; and no money to invest in new drilling.                                                                             
                                                                                                                                
9:38:51 AM                                                                                                                    
                                                                                                                                
Mr.  Tsafos  referred to  slide  2,  which showed  the  U.S.                                                                    
decreasing  because the  players did  not have  enough cash.                                                                    
Many  of the  companies were  small,  so they  chose not  to                                                                    
produce because of lack of  cash. He remarked that there may                                                                    
be more  downward pressure  on the price  when the  oil hits                                                                    
the  market, but  it was  at the  low level  price that  the                                                                    
marginal barrels could not keep producing.                                                                                      
                                                                                                                                
Senator Bishop  wondered where the  Monterey shale  would go                                                                    
on the chart. Mr. Tsafos replied  that he was not sure where                                                                    
the Monterey shale would be placed on the chart.                                                                                
                                                                                                                                
Senator Bishop wondered if  acquisition should be considered                                                                    
as  one  of   the  variable.  Mr.  Tsafos   replied  in  the                                                                    
affirmative.  He   explained  that  some   producers  became                                                                    
financially strapped,  and became  bankrupt at the  time the                                                                    
price of  oil fell. Ten  years ago, the major  oil producers                                                                    
had decided  to invest outside  of the U.S., so  the smaller                                                                    
independent companies  began producing  in the U.S.  At that                                                                    
point the major  producers returned to the  U.S. He remarked                                                                    
that some  of the diffusion  would be consolidated,  but was                                                                    
never at the level of  a conventional basin like Alaska. The                                                                    
stated  offered  large  land parcels.  The  lower  48  would                                                                    
divide similarly sized land parcels  into 40 or 50 different                                                                    
pieces.                                                                                                                         
                                                                                                                                
9:42:37 AM                                                                                                                    
                                                                                                                                
Senator Dunleavy  surmised that it was  previously extremely                                                                    
difficult  to   forecast  oil  production  and   price;  but                                                                    
currently  it  was  even more  difficult  to  forecast.  Mr.                                                                    
Tsafos agreed.                                                                                                                  
                                                                                                                                
Senator Dunleavy  wondered if the market  dynamics would put                                                                    
Alaska in  the neighborhood  of $40 to  $50 per  barrel. Mr.                                                                    
Tsafos replied in the affirmative.                                                                                              
                                                                                                                                
Senator  Dunleavy  felt  that the  Keystone  Pipeline  would                                                                    
provide the gateway from the  oil sands. Some people may say                                                                    
that the  oil sands  were uneconomic,  but the  cheap energy                                                                    
may  provide  the  ability  to  "cook  the  oil  sands."  He                                                                    
wondered  where the  corresponding  increase  supply of  gas                                                                    
within the calculus.  He remarked that there  were some that                                                                    
believed  that  gas competed  with  oil  in the  market.  He                                                                    
wondered how the  play of gas impacted  potential future oil                                                                    
prices,  in  addition  to the  greater  supply.  Mr.  Tsafos                                                                    
replied that there was a growth  in demand, but a decline in                                                                    
production. The  industrial sectors  saw a growth  in demand                                                                    
for  gas,  but  some  biofuels.  The  transportation  sector                                                                    
demanded  mostly biofuels.  He  remarked that  there was  an                                                                    
intense U.S. response to high  oil prices. He explained that                                                                    
the share  of gas in  the economy was  on the rise,  and the                                                                    
share of oil  was falling. He stated that  airlines began to                                                                    
fly on  high utilization, so  fuel was blamed  for cancelled                                                                    
flights.  The driving  patterns  of  Americans had  recently                                                                    
changed in  vehicle ownership. There  was a large  number of                                                                    
vehicles that  had been taken  off the fleet in  a five-year                                                                    
period, and a  high number of motorcycles on  the market. He                                                                    
remarked  that fuel  efficient car  ownership  was often  in                                                                    
response to  the high oil  prices, but the lower  oil prices                                                                    
did not  make a person  purchase a less fuel  efficient car.                                                                    
He  commented that  the government  subsidized the  price of                                                                    
gasoline in  Saudi Arabia, but  the consumer still  paid the                                                                    
same price. He  remarked that there was demand  in the world                                                                    
that did not experience price in  the same way that the U.S.                                                                    
and  Europeans  experienced  price. He  remarked  that  many                                                                    
other  countries had  subsidies  and bans  that limited  the                                                                    
changes in the oil price to the end user price.                                                                                 
                                                                                                                                
9:50:30 AM                                                                                                                    
                                                                                                                                
Senator   Dunleavy   understood   that   there   were   some                                                                    
technological advances  that helped  to limit  energy usage.                                                                    
He wondered how  the impact on the  environment affected the                                                                    
investment on the  Alaska North Slope (ANS).  He stated that                                                                    
the  Alaska  Liquid Natural  Gas  (AKLNG)  project would  be                                                                    
impacted the supply would be  limited, if the line continued                                                                    
to extend  beyond the  graph's limit.  He remarked  that the                                                                    
line's  extension would  make the  economics  for the  AKLNG                                                                    
project very difficult,  because it would be  expensive in a                                                                    
lower commodity environment.                                                                                                    
                                                                                                                                
Mr. Mayer responded  that one must think  about the contrast                                                                    
between the  nature of the  investment cycle  between Alaska                                                                    
and the lower 48. He explained  that the need to look at the                                                                    
diffusion of the different players  in the lower 48, and the                                                                    
point  at  which  there  was   a  press  response  to  lower                                                                    
production,  because  the  lower  48  quickly  responded  to                                                                    
declining prices.  The lower 48 was  continually determining                                                                    
the number  of new  wells that  would be  built in  the near                                                                    
future. Those  wells had steep decline  curves that required                                                                    
continual replacement to maintain  production. The nature of                                                                    
investment  decision making  in the  lower 48  was extremely                                                                    
different than the nature of  the investment decision on the                                                                    
North Slope. The North Slope  investment structure was about                                                                    
spending  billions of  dollars  by a  couple  of players  to                                                                    
build  enormous facilities,  drilling pads,  and bring  very                                                                    
large projects  online that would  produce for the  next few                                                                    
decades. He stated that the  behavior of the North Slope was                                                                    
beneficial  to  Alaska  in the  current  price  environment,                                                                    
because  the fundamental  nature of  the decisions  were not                                                                    
about the  upcoming six  months or year.  The nature  of the                                                                    
decisions were about the next  decade or longer. He stressed                                                                    
that  there were  two advantages  to Alaska  in the  current                                                                    
price  environment  for  long   term  investment:  1)  Large                                                                    
players  that make  decisions in  a fundamentally  different                                                                    
way  than the  lower  48.  He stated  that  there were  some                                                                    
company  executives that  made it  a point  of pride  to not                                                                    
know the price  of oil on any given day,  because it was not                                                                    
what  drives their  decisions;  and 2)  there  was a  fiscal                                                                    
system that looked competitive at  the current lower prices.                                                                    
He added that  there would be a  different consideration, if                                                                    
there was another decade of continued lowered oil prices.                                                                       
                                                                                                                                
9:57:46 AM                                                                                                                    
                                                                                                                                
Senator Bishop  felt that the  reservoir capacity,  and long                                                                    
term  production  in  the  fracking  facilities  were  still                                                                    
unknown. Mr.  Tsafos agreed. He  stated that  economists and                                                                    
geologists often clashed  when it came to  oil forecasts. He                                                                    
stated  that there  was a  time in  2007 when  he felt  that                                                                    
geologists  had   the  upper   hand,  because   prices  were                                                                    
extremely  high,  and  there  was  no  supply  response.  He                                                                    
stressed that  the oil market,  with all  its imperfections,                                                                    
worked. He  stated that the North  Slope was one of  the few                                                                    
places in the  world where the oil market truly  worked as a                                                                    
market on a large scale.                                                                                                        
                                                                                                                                
Senator  Bishop shared  that  he had  read  an article  that                                                                    
asserted that  without increased  oil production,  oil could                                                                    
return to $200 per barrel.                                                                                                      
                                                                                                                                
Co-Chair MacKinnon felt  that anyone can post  an opinion to                                                                    
the internet.                                                                                                                   
                                                                                                                                
Co-Chair  Kelly asked  for more  explanation of  India's oil                                                                    
market. He stated  that India was expected to  have a strong                                                                    
oil boom, and  it was slowly occurring. He  wondered how the                                                                    
future  of  India  would impact  Alaska's  oil  market.  Mr.                                                                    
Tsafos  responded   that  the  period  of   economic  growth                                                                    
required  addressing   fuel  subsidies.  He   remarked  that                                                                    
removing  subsidies  increased  the   price  of  energy.  He                                                                    
remarked that  oil demand in  India had more  potential, and                                                                    
felt that India could drive the market.                                                                                         
                                                                                                                                
10:04:49 AM                                                                                                                   
                                                                                                                                
Vice-Chair Micciche  looked at  the business model  of North                                                                    
Slope versus the  Texas models, noted the  credit issue with                                                                    
those that were  not producing. He remarked  that the larger                                                                    
companies looked  20 years into  the future,  versus smaller                                                                    
companies. He wondered if there  was a future in Alaska that                                                                    
included  realistic production  from smaller  companies. Mr.                                                                    
Tsafos  replied that  there  could not  be  a discussion  of                                                                    
competitive  landscapes  without  a geology  discussion.  He                                                                    
felt that  50 companies  could not  operate in  Prudhoe Bay.                                                                    
The  non-commercial gas  market worked  differently, because                                                                    
individual  wells  were  drilled,   rather  than  a  massive                                                                    
reservoir. He stressed  that there was an  inherent limit in                                                                    
the  geology,  so there  probably  would  not  be 50  or  60                                                                    
operators.                                                                                                                      
                                                                                                                                
Vice-Chair Micciche wondered if  there was a possibility for                                                                    
a  blending of  the  operators, where  some smaller  players                                                                    
would become  more productive at  15 or 20 percent  of North                                                                    
Slope production.  Mr. Mayer replied  that there had  been a                                                                    
decade-long  transformation  on  the  North  Slope  for  the                                                                    
smaller   companies.  He   felt   that,   given  the   right                                                                    
conditions, which would continue to grow.                                                                                       
                                                                                                                                
Co-Chair  MacKinnon explained  that  the  documents for  the                                                                    
day's  meeting  could  be  found  on  the  State  of  Alaska                                                                    
website.                                                                                                                        
                                                                                                                                
Mr. Mayer addressed slide 5,  "Net Credit Balance due to two                                                                    
flows."                                                                                                                         
                                                                                                                                
     Revenues net of credits used against tax liability                                                                         
     (big producers)-no cash outflow                                                                                            
                                                                                                                                
     Credits paid out in cash to companies that do not have                                                                     
     a liability                                                                                                                
                                                                                                                                
10:13:08 AM                                                                                                                   
                                                                                                                                
Vice-Chair  Micciche felt  that  Alaskans should  understand                                                                    
the  sunset  of  the  alternative  exploration  of  Frontier                                                                    
Basin,  and  small  producer  credits  in  2016.  Mr.  Mayer                                                                    
replied with slide 7, which  charted the credits to 2018. He                                                                    
stressed  that there  was more  uncertainty  in the  distant                                                                    
future,  because  there  were less  projects  forecasted  in                                                                    
TAPS.                                                                                                                           
                                                                                                                                
Vice-Chair  Micciche understood  that the  liability of  the                                                                    
credits would  sunset most of  the adverse effects  that the                                                                    
state  was currently  experiencing.  Mr.  Mayer agreed,  and                                                                    
wanted to highlight  some of the positive benefits  of SB 21                                                                    
on the state's revenue.                                                                                                         
                                                                                                                                
Mr. Mayer  continued to  address slide  5. He  stressed that                                                                    
the producers  paid taxes. The  slide showed the  high level                                                                    
tax calculation to  say that DOR accounted  for two separate                                                                    
credits  that   were  accounted:  credits  used   against  a                                                                    
producer's   tax  liability   and   credits  for   potential                                                                    
purchase. He  looked at the  line of production  tax revenue                                                                    
of $524 million in 2015, it  was net of all claimed credited                                                                    
by  producing  companies.  The greatest  component  was  the                                                                    
dollar per  barrel credit,  with current  low oil  price was                                                                    
approximately $8 per barrel.                                                                                                    
                                                                                                                                
Co-Chair Kelly  wondered if  $2.5 million in  FY 14  was the                                                                    
net profit. Mr. Mayer replied in the affirmative.                                                                               
                                                                                                                                
Co-Chair  MacKinnon   shared  that  many   Alaskans  thought                                                                    
"producer" only  referred to three large  oil companies, and                                                                    
was  exclusive  of other  companies.  She  noticed that  the                                                                    
presentation referred  to producers  that were  inclusive of                                                                    
an overall tax structure that  included many tax payers. Mr.                                                                    
Mayer agreed.                                                                                                                   
                                                                                                                                
Co-Chair   MacKinnon  stressed   that  the   producers  were                                                                    
referred  to every  tax paying  producer in  the state.  Mr.                                                                    
Mayer agreed, but  furthered that the majority  of the taxes                                                                    
came from the larger producers.                                                                                                 
                                                                                                                                
Mr. Mayer continued  to address slide 5,  and explained that                                                                    
it may be  a misnomer to refer to the  tax liability credits                                                                    
as beneficial credits to the producers.                                                                                         
                                                                                                                                
10:19:33 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer  looked  at  slide  6,  "Tax  Credits  and  SB21;                                                                    
positive impact of SB21 on revenues."                                                                                           
                                                                                                                                
     Under RSB assumptions for oil  price and production, SB
     21 brings more revenue than  ACES would have in both FY                                                                    
     2015  and FY  2016; in  fact,  in FY  2016, under  ACES                                                                    
     producers would pay no tax and carry a credit forward.                                                                     
                                                                                                                                
     Main differences are binding gross minimum and                                                                             
     elimination of capital credits.                                                                                            
                                                                                                                                
Mr. Mayer looked at the bottom  six sections of the table on                                                                    
slide  6.  He  began  with   $12  billion  of  revenue  from                                                                    
production; and  reduced by  $1.5 billion  in transportation                                                                    
costs and  $7 billion in lease  expenditures. The production                                                                    
tax  value would  equate to  approximately $3.7  billion, in                                                                    
terms  of  the total  taxable  value  under either  Alaska's                                                                    
Clear and Equitable Share (ACES)  or SB 21. He stressed that                                                                    
there  was a  35 percent  base rate  under SB  21; and  a 25                                                                    
percent base rate under ACES.  He stated that ACES would not                                                                    
affect any  calculations the low  price and  high investment                                                                    
environment. He looked  at line 4, which  the Revenue Source                                                                    
Book forecasted  the reduction of  $720 million  against the                                                                    
tax liability claimed  by the producers in  the North Slope.                                                                    
He pointed  out that the  total tax  after credits in  FY 15                                                                    
was $605  million under FY  21. He remarked that  ACES would                                                                    
have a significantly different outcome.                                                                                         
                                                                                                                                
10:25:53 AM                                                                                                                   
                                                                                                                                
Vice-Chair Micciche surmised that  the difference between SB
21 and  ACES in  FY 15 was  approximately $380  million that                                                                    
would  not have  under ACES.  He further  asserted that  the                                                                    
difference in FY  16 was $529 million.  The total difference                                                                    
was  approximately  $1 billion.  Mr.  Mayer  replied in  the                                                                    
affirmative.  He  stressed  that  the  liability  should  be                                                                    
considered, and its impact on future revenue.                                                                                   
                                                                                                                                
Vice-Chair Micciche  surmised that  the estimate in  the low                                                                    
price  environment was  healthy  for the  general fund,  and                                                                    
would possible slow  the decline. He felt  that Alaska would                                                                    
expect  a greater  positive influence  from the  tax change,                                                                    
following the  expiration of  the tax  credits in  2016. Mr.                                                                    
Mayer agreed,  and remarked  that ACES  focused on  high oil                                                                    
prices and low investment.                                                                                                      
                                                                                                                                
Co-Chair Kelly felt  that many members of the  press had not                                                                    
been fair in their reporting of SB 21.                                                                                          
                                                                                                                                
Co-Chair  MacKinnon felt  that  the change  to Alaska's  tax                                                                    
structure had an impact on Alaska's bottom line.                                                                                
                                                                                                                                
Vice-Chair Micciche  remarked that  the presentation  for FY                                                                    
15  was  based on  actual  numbers,  and remarked  that  the                                                                    
benefit of  SB 21  brought $380 million  to GF,  which would                                                                    
not  have occurred  under ACES.  He  stated that  the FY  16                                                                    
forecast assumed an additional $525 million under SB 21.                                                                        
                                                                                                                                
10:31:53 AM                                                                                                                   
                                                                                                                                
Senator Hoffman asked for a  review of the reconciliation on                                                                    
line  4,  specifically  the  difference  from  the  previous                                                                    
slide. Mr. Mayer  replied that the slide  was an abstracted,                                                                    
high  level  outline of  the  tax  credit, rather  than  the                                                                    
detailed  analysis  of  DOR.  He  explained  that  the  $720                                                                    
million on  line 4 referred  to the credits  claimed against                                                                    
liability for the  North Slope. The previous  figure of $750                                                                    
million also included the Cook Inlet.                                                                                           
                                                                                                                                
Co-Chair  MacKinnon stressed  that the  presentation was  an                                                                    
aggregate look at the performance  of two different systems.                                                                    
Mr. Mayer agreed.                                                                                                               
                                                                                                                                
Senator Dunleavy  remarked that a  major component of  SB 21                                                                    
was to  provide a favorable investment  environment, because                                                                    
of decline  in production.  He furthered that  the secondary                                                                    
focus of  SB 21 was to  capture revenue on the  low price of                                                                    
oil. He noted  that the state's revenue was  larger under SB
21 versus  ACES. He hoped  that the  low oil prices  did not                                                                    
deter investment,  and encouraged the producers  to continue                                                                    
to invest in the state.  Mr. Mayer replied that Alaska still                                                                    
looked competitive,  and was  well served  in the  nature of                                                                    
investment opportunities.                                                                                                       
                                                                                                                                
Senator Bishop suggested  that it may be  cheaper for Alaska                                                                    
to explore other credit options.                                                                                                
                                                                                                                                
Mr. Mayer continued to discuss  slide 6. He stressed that SB
21  affected the  way  that credits  interacted  with the  4                                                                    
percent  gross minimum  floor. The  4 percent  gross minimum                                                                    
floor was  in the tax statute  under ACES, but it  was never                                                                    
binding,  because of  the capital  credit  functions. The  4                                                                    
percent  floor, under  ACES,  only applied  to  line 1.  Any                                                                    
substantial producers that made  major new investments could                                                                    
take  their  tax liability  below  the  4 percent  of  gross                                                                    
revenue  on their  tax liability.  He explained  that SB  21                                                                    
replaced the  credits with the  dollar per  barrel allowance                                                                    
that would  reduce the  tax liability  at low  price levels,                                                                    
but the dollar per barrel amount  could not fall below the 4                                                                    
percent floor.                                                                                                                  
                                                                                                                                
10:37:43 AM                                                                                                                   
                                                                                                                                
Co-Chair  MacKinnon remarked  that there  had been  a debate                                                                    
about  connecting a  tax credit  with a  barrel of  oil. She                                                                    
wondered  if  there  was  a  credit  tied  to  a  barrel  of                                                                    
production  sold  on its  behalf,  or  was  it part  of  the                                                                    
formula.  Mr.   Mayer  responded  that  he   did  not  fully                                                                    
understand  the  question. He  explained  that  there was  a                                                                    
dollar per barrel  credit of a variable  amount. He restated                                                                    
that it was a  credit, but it was more a  feature of the tax                                                                    
system that  existed to reduce  the tax rate in  lower price                                                                    
environments.                                                                                                                   
                                                                                                                                
Co-Chair  Kelly surmised  that if  there  was no  production                                                                    
there  would  be  no  credit.   Mr.  Mayer  replied  in  the                                                                    
affirmative for the major producers.                                                                                            
                                                                                                                                
Senator Dunleavy  wondered if there  was any aspect  of ACES                                                                    
that  would be  favorable  in the  current environment.  Mr.                                                                    
Mayer replied that  ACES was a good tax system  in a harvest                                                                    
environment, but  did not feel  that ACES was a  good system                                                                    
in the current environment.                                                                                                     
                                                                                                                                
Co-Chair  Kelly remarked  that ACES  did not  have a  credit                                                                    
associated with production. Mr. Mayer agreed.                                                                                   
                                                                                                                                
Co-Chair  Kelly  felt  that  ACES   would  not  ever  be  an                                                                    
advantage,  whether prices  were  high or  low. He  stressed                                                                    
that there  should always be  production. Mr.  Mayer replied                                                                    
that  SB  21 eliminated  the  capital  credit of  ACES,  and                                                                    
replaced it with the dollar  per barrel amount that was tied                                                                    
to production.  He stressed that capital  credits existed as                                                                    
a means of state support for  spending. He stated that SB 21                                                                    
took  less of  the revenue,  but the  dollar per  barrel was                                                                    
intended to reduce the tax rate.                                                                                                
                                                                                                                                
Co-Chair  MacKinnon remarked  that  the result  of ACES  was                                                                    
depositing  a substantial  amount  of money  in the  state's                                                                    
reserves.                                                                                                                       
                                                                                                                                
10:43:00 AM                                                                                                                   
                                                                                                                                
Co-Chair  Kelly  wondered   if  ACES  incentivized  "harvest                                                                    
mode."  Mr. Mayer  stressed that  ACES incentivized  capital                                                                    
spending.                                                                                                                       
                                                                                                                                
Senator Olson  wondered how to protect  Alaska's revenues in                                                                    
the following  stage of the  regime. Mr. Mayer  replied that                                                                    
Alaska's disadvantage  was the  instability of  previous oil                                                                    
tax structures.                                                                                                                 
                                                                                                                                
                                                                                                                                
Senator Hoffman  felt that term  "harvest mode"  referred to                                                                    
the  maximum  amount of  oil  that  could be  recovered.  He                                                                    
understood that the  change was to reverse  the downtrend of                                                                    
production.                                                                                                                     
                                                                                                                                
Co-Chair  MacKinnon   agreed  that  there  should   be  more                                                                    
production.                                                                                                                     
                                                                                                                                
10:48:56 AM                                                                                                                   
                                                                                                                                
Mr.  Mayer  discussed  slide  7,   "Tax  Credits  and  SB21;                                                                    
positive impact  of SB21  on revenues."  He stated  that the                                                                    
slide represented  a broad  outlook of  the DOR  figures for                                                                    
the following four years. He  explained that the yellow line                                                                    
referred to the  credits used against tax  liability and the                                                                    
green  line  represented the  credits  for  purchase by  the                                                                    
state.                                                                                                                          
                                                                                                                                
Mr.  Mayer  highlighted  slide 8,  "Tax  Credits  and  SB21;                                                                    
credit eliminations and transitional arrangements":                                                                             
                                                                                                                                
     Sunset for small producer-focused credits                                                                                  
                                                                                                                                
          Alternative Credit for Exploration                                                                                    
                                                                                                                                
          Frontier Basin Credit                                                                                                 
                                                                                                                                
          Small Producer Credit                                                                                                 
                                                                                                                                
               - Collectively cost $113 million in FY2014                                                                       
                                                                                                                                
     Impact of transitional arrangements                                                                                        
                                                                                                                                
          Support for small producer spending at 45 percent                                                                     
          until                                                                                                                 
                                                                                                                                
          January 2016 (same as ACES)                                                                                           
                                                                                                                                
          Reduced to 35 percent thereafter                                                                                      
                                                                                                                                
10:53:18 AM                                                                                                                   
                                                                                                                                
Senator  Dunleavy  requested  an   analysis  of  Cook  Inlet                                                                    
credits  versus  North  Slope  credits.  Co-Chair  MacKinnon                                                                    
replied that  the analysis could  not be run because  of the                                                                    
limited number of tax payers in those regions.                                                                                  
                                                                                                                                
                                                                                                                                
Mr.  Mayer addressed  slide 9,  "Cook Inlet  remains heavily                                                                    
subsidized":                                                                                                                    
                                                                                                                                
     Production essentially a continuation of 'ELF':                                                                            
                                                                                                                                
          Low, fixed rate on gas                                                                                                
                                                                                                                                
          Generally no tax on most oil production                                                                               
                                                                                                                                
     But significant credits to Cook Inlet producers:                                                                           
                                                                                                                                
          20 percent capital credit                                                                                             
                                                                                                                                
          40 percent well expenditure credit                                                                                    
                                                                                                                                
          25 percent carried-forward annual loss credit                                                                         
                                                                                                                                
     With no profit-based production tax, credits are not,                                                                      
     as on North Slope, an investment in future production                                                                      
     tax revenue                                                                                                                
                                                                                                                                
     Could other solutions - such as state financing -                                                                          
     offer a better solution to ease capital constraints?                                                                       
                                                                                                                                
10:57:00 AM                                                                                                                   
                                                                                                                                
Vice-Chair Micciche stated that there  were two types of oil                                                                    
and  gas  production  in Alaska:  the  production  that  was                                                                    
destined for GF on the  North Slope; and the production that                                                                    
was destined  for the furnaces,  water heaters,  and vehicle                                                                    
fuel tanks.  He stated  that there were  conversations about                                                                    
for Fairbanks  from Cook Inlet.  He stated that he  hoped to                                                                    
continue the conversation about  availability of natural gas                                                                    
to Alaskans.                                                                                                                    
                                                                                                                                
Senator Hoffman  shared that  he was  looking to  reduce the                                                                    
energy costs for 100 percent of Alaskans.                                                                                       
                                                                                                                                
Mr. Mayer displayed slide 10, "Conclusions":                                                                                    
                                                                                                                                
     Oil price drop due to excess supply and bearish                                                                            
     demand-and OPEC acknowledging reality                                                                                      
                                                                                                                                
     Big producers still paying large sums but not enough                                                                       
     to offset credits paid to small companies                                                                                  
                                                                                                                                
     SB 21 placed a more secure floor under state revenues                                                                      
     when oil prices fall and eliminated many credits                                                                           
                                                                                                                                
     Cook Inlet production still receives substantial state                                                                     
     support-is the policy mix right?                                                                                           
                                                                                                                                
ADJOURNMENT                                                                                                                   
11:00:45 AM                                                                                                                   
                                                                                                                                
The meeting was adjourned at 11:00 a.m.                                                                                         
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
020215 updated SFC enalytica Oil Prices January 2015.pdf SFIN 1/27/2015 9:00:00 AM
Oil and Gas
020215 updated SFC enalytica Tax Credits January 2015.pdf SFIN 1/27/2015 9:00:00 AM
Oil and Gas
012715 enalytica presentation - Tax Credits.pdf SFIN 1/27/2015 9:00:00 AM
Oil and Gas